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November 21, 2000 at 12:00 AM EST

Finisar Corporation Announces Financial Results for Second Quarter Ended October 31, 2000 And Agreements to Acquire: Demeter Technologies, Transwave Fiber and Shomiti Systems

Finisar Corporation Announces Financial Results for Second Quarter Ended October 31, 2000 And Agreements to Acquire: Demeter Technologies, Transwave Fiber and Shomiti Systems SUNNYVALE, Calif.--(BUSINESS WIRE)--Nov. 21, 2000--Finisar Corporation (NASDAQ:FNSR), a leading provider of gigabit fiber optic solutions for high-speed data networks, today reported financial results for its second fiscal quarter ended October 31, 2000. At the same time, the Company announced that it had entered into definitive agreements to acquire Demeter Technologies, Transwave Fiber and Shomiti Systems. In the case of Demeter Technologies, the Company announced that it had also completed the acquisition.

Management will host an earnings conference call on its web site at www.finisar.com at 5:00 p.m. EDT (2:00pm PDT) to discuss the results for the quarter, the outlook for the Company going forward, and the announcement to acquire three companies. CURRENT QUARTER RESULTS

The financial results for the Company's current quarter include the results of Sensors Unlimited for one month. The acquisition of Sensors was recorded as a purchase with an initial value of approximately $356 million based on the initial issuance of approximately 9.5 million shares of Finisar common stock, the assumption of outstanding stock options, and cash used in completing the transaction. An additional 9.5 million shares of Finisar common stock may be issued to former Sensors shareholders over the next three years pursuant to the merger agreement. Any such additional consideration will be recorded at the time of issuance. With the initial shares issued to acquire Sensors Unlimited, the Company had approximately 170 million shares outstanding at the end of the quarter.

Total revenues for the second quarter of fiscal 2001 were a record $44.5 million, up 177% from the second quarter of fiscal 2000 and up 64% sequentially from the immediately preceding quarter. Total revenues include sales of optical subsystems of $37.3 million and sales of network performance test systems of $7.2 million. Sales of optical subsystems were up 245% from the second quarter of fiscal 2000 and up 69% sequentially. Sales of network test systems were up 37% from the second quarter of fiscal 2000 and up 39% sequentially.

Pro forma gross margin excluding non-cash charges for the amortization of acquisition-related costs rose sequentially to 41.5% in the second quarter compared to 39.5% in the previous quarter. Pro forma operating margins also improved sequentially to 15.2% in the second quarter compared to 9.3% in the previous quarter.

Pro forma net income excluding non-cash charges for deferred compensation and acquisition-related costs and cash charges for other acquisition-related compensation was a record $7.5 million, or $.04 per diluted share, in the second quarter, an increase of 461% from $1.3 million, or $.01 per diluted share, from the second quarter of fiscal 2000 and up 53% sequentially from $4.9 million, or $.03 per diluted share, in the previous quarter.

Including the non-cash charges for deferred compensation and acquisition-related costs and cash charges for other acquisition-related compensation in accordance with generally accepted accounting principles, the Company recorded a loss of $22.5 million, or $.15 per diluted share, in the second quarter compared to a loss of $387,000, or $.00 per diluted share, in the second quarter of the prior year. The non-cash charges related to the Sensors Unlimited acquisition include $23.0 million related to the purchase of in-process research and development, $5.9 million in amortization of acquired intangible assets, $0.2 million in amortization of deferred compensation and $388,000 for other acquisition-related compensation charges, net of estimated tax savings.

The Company's cash and short-term investments balance was $269 million at the end of October, 2000 compared to $315 million at the end of July, 2000. Of the $46 million decrease, approximately $25 million is related to the use of cash in the acquisition of Sensors Unlimited, $11 million was used in strategic investments in other businesses and approximately $10 million was related to working capital requirements associated with the Company's growth during the last quarter.

"The revenue growth that we saw during this most recent quarter is further evidence that the demand for storage and gigabit connectivity continues to grow at an unprecedented rate," said Jerry Rawls, Finisar's President and CEO. "Excluding Sensors Unlimited which accounted for less than $3 million in revenues, our growth in the most recent quarter came primarily from the same group of customers who build Fibre Channel and Gigabit Ethernet systems. Furthermore, we believe the sequential increase in our sale of 2 Gb/s network performance test systems is a positive leading indicator for the rollout of 2 Gb/s Fibre Channel SAN's next year," added Rawls.

"We were pleased to see our gross margins improve during the quarter and begin to reflect our efforts to reduce product costs," said Rawls. "Even without the results of Sensors Unlimited, our gross margins were up sequentially from the previous quarter." ACQUISITIONS

The Company announced that it had entered into definitive agreements to acquire three companies: Demeter Technologies, Inc., Transwave Fiber, Inc., and Shomiti Systems, Inc.

"With respect to our acquisition activity, I think it's important for investors to understand that we are laying a broader foundation on which to build our future by acquiring these fundamental technologies," said Jerry Rawls, Finisar's President and CEO. "We are not looking to buy market share. We are focused on acquiring the technologies that will empower us to continue to provide the timely gigabit solutions that our customers need." added Rawls. "We expect these companies to continue to supply their existing customers while we draw on a deeper pool of talent for developing new, innovative, and cost effective products for the LAN, SAN, and MAN marketplace."

ACQUISITION OF DEMETER TECHNOLOGIES, INC.

Demeter Technologies was founded in August 2000. The founders of Demeter have extensive experience in manufacturing laser diodes in large volumes. With its early access to semiconductor processing equipment for epitaxial growth and ability to employ world class manufacturing techniques, Demeter has already demonstrated state-of-the-art laser diodes that can be directly modulated at speeds up to 10 gigabits per second. With the acquisition of Demeter, Finisar gains access to this fundamental technology in its quest to extend its capabilities as a provider of next generation fiber optic network equipment for Gigabit Ethernet, Fibre Channel and SONET.

Under the terms of the agreement, Demeter Technologies merged with a wholly-owned subsidiary of Finisar, and Demeter's stockholders received approximately 6.6 million shares of Finisar Common Stock, including shares issuable upon exercise of options assumed in the merger. The transaction will be accounted for as a purchase and is intended to qualify as a tax-free reorganization. The closing price of Finisar's Common Stock on November 20, 2000 was $22.13 per share, giving the transaction an approximate value of $146 million. The acquisition was completed on November 21, 2000 and will be included in the financial results of Finisar for the third fiscal quarter ending January 31, 2001.

ACQUISITION OF TRANSWAVE FIBER, INC.



Established in February 2000 in Fremont, California, Transwave Fiber has focused on the development of passive optical components for fiber optic networks. These products build on the Company's core competencies in fusion couplers, crystal processing and instrumentation technologies. With access to a considerable pool of engineering talent plus manufacturing operations at its subsidiary in Shanghai, China, Transwave has quickly exercised its technical prowess by developing a broad line of passive optical products for datacom and telecom applications.

Under the terms of the agreement, Transwave Fiber will merge with Finisar, and Transwave stockholders will be entitled to receive up to approximately 3.6 million shares of Finisar Common Stock including shares issuable upon exercise of options assumed in the merger. One-third of the shares issued in the merger will be deposited in an escrow and will be released to the former shareholders of Transwave Fiber upon the achievement of certain financial and technical milestones during a three year period following the completion of the merger. The transaction will be accounted for as a purchase and is intended to qualify as a tax-free reorganization. The closing price of Finisar's Common Stock on November 20, 2000 was $22.13 per share, giving the transaction an approximate value of $80 million. The transaction is expected to close during the first calendar quarter of 2001 and is subject to approval by Transwave's stockholders and other customary conditions.

ACQUISITION OF SHOMITI SYSTEMS, INC.

Established in 1995, Shomiti Systems is a technology leader in designing products which measure the performance of Ethernet networks in order to enhance their quality of service (QoS). Shomiti's award winning "Surveyor" and "Explorer" line of products are currently being deployed for measuring and monitoring 10-100 megabit and Gigabit Ethernet local area networks (LANs) and e-commerce storage server farms. With the acquisition of Shomiti Systems, Finisar will gain access to this fundamental technology in its quest to extend its capabilities as a provider of next generation test equipment for Fibre Channel, Gigabit Ethernet and Infiniband networks.

Under the terms of the agreement, Shomiti Systems will merge with a wholly-owned subsidiary of Finisar, and Shomiti stockholders will be entitled to receive up to approximately 4.3 million shares of Finisar Common Stock including shares issuable upon exercise of options assumed in the merger. The transaction will be accounted for as a purchase and is intended to qualify as a tax-free reorganization. The closing price of Finisar's Common Stock on November 20, 2000 was $22.13 per share, giving the transaction an approximate value of $95 million. The transaction is expected to close during the first calendar quarter of 2001 and is subject to approval by Shomiti's stockholders, the notification requirements of the Hart-Scott-Rodino Antitrust Act and other customary conditions. BUSINESS OUTLOOK

Finisar plans to review its second quarter results and discuss its outlook for the upcoming quarter and future periods during a conference call for investors at 5:00pm EDT (2:00pm PDT) today, Tuesday, November 21. The call will be broadcast live over the Internet on the investor relations section of Finisar's Web site, located at www.finisar.com. To listen to the Webcast, interested investors are encouraged to log onto the broadcast at least 15 minutes prior to the call. Participating in the call will be Jerry Rawls, Finisar's President and CEO,and Steve Workman, Finisar's CFO. FINISAR REVISES ITS PROCEDURES PURSUANT TO NEW REGULATION FD

In connection with the recent adoption of new SEC rules on corporate disclosure, Finisar will make forward-looking statements in its web conference calls regarding expected financial results for the upcoming quarter and additional future periods. Finisar will keep its latest earnings release and web conference call publicly available on its web site at www.finisar.com but assumes no obligation to update any forward looking statements contained therein although it may choose to do so from time to time in accordance with the provisions of Regulation FD. Following the quarterly earnings release, Finisar will continue its current practice of having corporate representatives meet privately during the quarter with investors, the media, investment analysts and others. SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The statements contained in this press release that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding Finisar's expectations, beliefs, intentions, or strategies regarding the future. All forward-looking statements included in this press release are based upon information available to Finisar as of the date hereof, and Finisar assumes no obligation to update any such forward-looking statements. Forward-looking statements involve risks and uncertainties, which could cause actual results to differ materially from those projected. These risks include those associated with the rapidly evolving markets for Finisar's products and uncertainty regarding the development of these markets; Finisar's historical dependence on sales to a limited number of customers and fluctuations in the mix of customers in any period; ongoing new product development and introduction of new and enhanced products; the challenges of rapid growth; intensive competition; and potential problems related to the assimilation and integration of the operations, technologies and products of two recently acquired companies, Sensors Unlimited and Demeter Technologies, as well as those of Transwave Fiber and Shomiti Systems which Finisar has agreed to acquire. Other risks relating to Finisar's business are set forth in Finisar's Annual Report on Form 10-K and other interim reports as filed with the Securities and Exchange Commission.

ABOUT FINISAR

Finisar Corporation (NASDAQ:FNSR) is a leading provider of fiber optic subsystems and network performance test systems which enable high-speed data communications over Gigabit Ethernet local area networks (LANs), Fibre Channel storage area networks (SANs), and wide-area and metropolitan data networking applications (WANs and MANs). The Company is focused on the application of digital fiber optics to provide a broad line of high-performance, reliable, value-added optical subsystems for networking and storage equipment manufacturers. The Company's headquarters are located at 1308 Moffett Park Drive, Sunnyvale, CA 94089. For more information, visit the Company's web site at http://www.finisar.com.

Finisar Corporation

             Pro Forma Consolidated Statement of Operations

                (In thousands, except per share amounts)

  

                         Three Months Ended         Six Months Ended

                            October 31,                 October 31,

                          2000        1999          2000        1999

                      ---------    ---------    ---------    ---------

 Revenues

  Optical subsystems  $  37,325    $  10,828    $  59,363    $  20,308

  Test systems            7,203        5,249       12,377        9,648

                      ---------    ---------    ---------    ---------

    Total revenues       44,528       16,077       71,740       29,956

  

 Cost of revenues        26,028        7,878       42,499       14,130

                      ---------    ---------    ---------    ---------

 Gross profit            18,500        8,199       29,241       15,826

  

 Operating expenses:

  Research and

    development           6,320        3,333       10,634        6,173

  Sales and marketing     3,693        1,895        6,200        3,437

  General and

    administrative        1,722          864        3,107        1,623

                      ---------    ---------    ---------    ---------

     Total operating

      expenses           11,735        6,092       19,941       11,233

  

 Income from operations   6,765        2,107        9,300        4,593

 Interest income, net     4,055          (84)       8,500         (173)

 Other non-operating

  income (expense), net     (21)         (28)         (43)         (56)

                      ---------    ---------    ---------    ---------

 Income before

  income taxes           10,799        1,995       17,757        4,364

 Provision for

  income taxes            3,291          659        5,327        1,488

                      ---------    ---------    ---------    ---------

 Net income               7,508        1,336    $  12,430    $   2,876

                      =========    ==========   =========    =========

 Net income per

  share - basic       $    0.05    $    0.02    $    0.08    $    0.03

                      =========    ==========   =========    =========

 Net income per

  share - diluted     $    0.04    $    0.01    $    0.07    $    0.02

                      =========    =========    =========    =========

 Shares used in

  per-share

  calculation-basic     154,313       88,650      152,115       88,521

 Shares used in

  per-share

  calculation-diluted   169,225      130,086      167,227      129,087

  

     The above pro forma results for the three months and six months

 ended October 31, 2000 have been adjusted to exclude non-cash charges

 for the amortization of deferred compensation and merger related

 costs. Results including these charges under generally accepted

 accounting principles are summarized below:

  

                           Finisar Corporation

                  Consolidated Statement of Operations

                (In thousands, except per share amounts)

  

                          Three Months Ended       Six Months Ended

                              October 31,              October 31,

                           2000        1999         2000         1999

                      ---------    ---------    ---------    ---------

 Revenues

  Optical subsystems  $  37,325    $  10,828    $  59,363    $  20,308

  Test systems            7,203        5,249       12,377        9,648

                      ---------    ---------    ---------    ---------

    Total revenues       44,528       16,077       71,740       29,956

  

 Cost of revenues        26,028        7,878       42,499       14,130

 Amortization

  of acquired developed

  technology                916         --            916         --

                      ---------    ---------    ---------    ---------

 Gross profit            17,584        8,199       28,325       15,826

  

 Operating expenses:

  Research and

    development           6,320        3,333       10,634        6,173

  Sales and marketing     3,693        1,895        6,200        3,437

  General and

   administrative         1,722          864        3,107        1,623

  Amortization of

   deferred 

   compensation           1,183        1,723        2,882        2,010

  In-process

   Research and

   Development           23,027         --         23,027         --

  Amortization of

   intangibles            5,002         --          5,002         --

  Other acquisition

   compensation             554         --            554

                      ---------    ---------    ---------    ---------

   Total operating

     expenses            41,501        7,815       51,406       13,243

  

 Income from

  operations            (23,917)         384      (23,081)       2,583

 Interest

  income, net             4,055          (84)       8,500         (173)

 Other non-operating

  income

  (expense), net            (21)         (28)         (43)         (56)

                      ---------    ---------    ---------    ---------

 Income before

  income taxes          (19,883)         272      (14,624)       2,354

 Provision for

  income taxes            2,601          659        4,637        1,488

                      ---------    ---------    ---------    ---------

 Net income (loss)      (22,484)   $    (387)   $ (19,261)   $     866

                      =========    =========    =========    =========

 Net income (loss)

  per share - basic   $   (0.15)   $   (0.00)   $   (0.13)   $    0.01

                      =========    =========    =========    =========

 Net income (loss)

  per share - diluted $   (0.15)   $   (0.00)   $   (0.13)   $    0.01

                      =========    =========    =========    =========

 Shares used in

  per-share

  calculation-basic     154,313       88,650      152,115       88,521

 Shares used

  in per-share

  calculation-diluted   154,313       88,650      152,115      129,087

  

                           FINISAR CORPORATION

                       CONSOLIDATED BALANCE SHEETS

                             (In thousands)

                             November 21, 2000

  

                                       October 31,    April 30,

 ASSETS                                   2000          2000

                                       ---------    ---------

  Cash and short-term investments      $ 269,232    $ 320,735

  Accounts receivable, net                29,615       14,348

  Inventories                             36,582       16,494

  Income tax receivable                    1,539          148

  Other receivables                        5,514          151

  Deferred tax asset                       2,384        2,653

  Other current assets                       636          278

                                       ---------    ---------

    Total current assets                 345,502      354,807

  Property, plant, equipment

     and improvements, net                20,914        9,426

  Intangible assets                       60,638         --

  Goodwill                               286,121         --

  Other long-term assets                  13,007          809

                                       ---------    ---------

  Total assets                         $ 726,182    $ 365,042

                                       =========    =========

  

 LIABILITIES AND STOCKHOLDERS'

   EQUITY

  Accounts payable                        16,053        5,908

  Accrued compensation                     4,339        3,001

  Other accrued liabilities               11,894        3,065

  Income taxes payable                      --            122

  Short-term debt                            633         --

  Capital lease obligations,

    current portion                         --           --

                                       ---------    ---------

    Total current liabilities             32,919       12,096

  Notes payable, long-term portion          --           --

  Capital lease obligations,

   long-term portion                        --           --

  Long-term debt                           1,493         --

  Other long-term liabilities                893          524

  Deferred tax liability                  28,048         --

  

  Preferred stock                           --           --

  Common stock                           687,276      384,686

  Deferred stock

     compensation                        (15,266)      (9,404)

  Notes receivable from stockholders      (2,394)      (3,248)

  Unrealized loss on

    short-term investments                   162         (182)

  Retained earnings                       (6,949)     (19,430)

                                       ---------    ---------

    Total preferred stock and

      stockholders' equity               662,829      352,422

                                       ---------    ---------

  Total liabilities and

   stockholders' equity                $ 726,182    $ 365,042

                                       =========    =========